The Dow Jones Industrial Average has climbed steadily over the last few years. However, the most recent technical trend and fundamentals predict the stock market’s future might not be so smooth.
The Dow is one of the key stock market indices in the U.S. The index is a price-weighted average of thirty significant companies traded on the New York Stock Exchange (NYSE) and the NASDAQ.
Over the past several years, the 200-day moving average has acted as a support for the Dow. As you can see in the chart below, the index has hit the support seven times since the end of 2012. During this period, each time the Dow hit the 200-day moving average, it bounced back.
(Chart Courtesy of StockCharts.com)
Right now the index is touching the support again. However, there is a good chance that it won’t bounce back.
Here’s the problem: after the Dow hit the 200-day moving average in October 2013, the rise of the index became smaller each time it hit the support. The increase in the index from October to December 2013 was 11.8%. From February to July 2014, the rise was 10.6%. From then on, the rise of the Dow after hitting the support never broke 10%, with the most recent increase at 6.1% from February to May of 2015.
The shrinking size of each increase after bouncing off the support shows that there is not enough momentum to carry the index higher. These are the times where sentiment might come into play and investors may switch directions.
Fundamentals are kicking in this time as the global economy slows down and uncertainty rises. China’s stock market crashed hard, with the Shanghai Composite losing 27% in a couple of weeks. In the Greek referendum on Sunday July 5th, the country’s citizens said “No” to the austerity measures demanded by its creditors. The possibility of Greece leaving the eurozone becomes substantial. As uncertainty increases in the area, European stock tumbled on Monday July 6th.
The U.S. is not an isolated island from what is going on around the globe. Many of the companies in the Dow have business overseas. Europe and China are major markets for many U.S. multinationals. When the economy in these markets slows down, the U.S. corporations will face challenges in generating revenue and income.
Both technical and fundamental analyses suggest the Dow’s trend may reverse. I wouldn’t be surprised if a downturn starts soon.